Each week - time permitting - I will publish articles here, exclusive to SA readers, providing what I believe are the top-most stocks within four distinct sectors I follow - technology, industrial, healthcare, and consumer stocks. In this specific article, I will focus purely on stocks within the consumer (discretionary and staples) sector.
Every stock included within these articles are researched to the best of my ability, and combine both key fundamentals and some technical analysis (specifically price/volume activity).
The objective of this method of analysis is to combine both fundamental and price/volume activity towards identifying quality companies which are potentially under accumulation (often indicating the early stages of a positive price trend).
On a practical level, I maintain a 'qualitative' watchlist of all NYSE/AMEX/Nasdaq listed stocks, above a $50M market-cap, for each of the four sectors mentioned above. Each stock within a watchlist needs to pass strict fundamental screening criteria, as follows...
- U.S. Listed Stocks Only (No OTC, or Non-U.S. Domiciled Companies)
- Market Cap Above $50M
- Consumer (Discretionary and Staples) Sector Only
- Average (90-Day) Volume Above 5,000
- Improving Sales Revenue
- Improving Gross Profit Margin
- Improving Operating Margin Growth
- Healthy Operating Income to Enterprise Value Ratio (Minimum 3%)
- Healthy Free Cash Flow to EV (FCF/EV) Ratio (Minimum 3%)
- Low Debt-to-Capital Ratio (Less Than 50%)
- Strong Recent Volume Activity, Relative to Average Volume
Applying the above screen rules results in a 'watchlist' of quality stocks within this particular sector, with positive, qualifying fundamentals (minimal criteria).
The list is then ranked (sort-ordered) by the core value metric Enterprise Value-to-EBITDA (EV/EBITDA), from lowest to highest (the lower the EV/EBITDA ratio, the more potentially undervalued the stock).
The underlying strategy is to watch these stocks closely, especially during strong price reversals/continuations backed by strong relative volume, which often triggers a continuation of the trend. The current top three stocks from the consumer sector are discussed in more detail, in the balance of this article.
Screen Date: 22nd May 2018 Intraday
Focus: Consumer Sector
Top 3 stocks:
(1) LifeVantage Corp. (LFVN)
(2) PulteGroup Inc. (PHM)
(3) TRI Pointe Group Inc. (TPH)
Sandy, Utah-based maker of nutraceutical dietary supplements and skin care products, LifeVantage Corporation has enjoyed a firm, sustainable upward move in its market cap since early April, where the stock bottomed at around $3.50 a share, supported by strong buy-side volume. The stock has moved up gradually, interspersed by a 10-day consolidation phase from mid-April to early May. In the last 8 days, the stock has rallied to today’s price of $4.81, and this continuing momentum is backed by strong fundamentals.
The most recent quarter reported sales growth of 12.34% (relative to the same quarter a year ago). Gross margins grew by an additional 1.45%, while operating margins rose significantly by 248.55%. Operating income to enterprise value currently stands at 13.19%, while free cash flow to EV (FCF/EV) is at a healthy 5.33%. The company has a reasonable debt-to-capital ratio of 23.61%. Current EV/EBITDA multiple stands at 6.48, providing a basis for continuing upside in the stock price. This is backed by a relative volume over the past four days exceeding 188.4% of the 90-day average daily volume (Source: CapitalIQ).
The stock price in homebuilder PulteGroup Inc. has oscillated within an upward trending channel, following the late-January to early-February correction triggered by lowered 2018 expectations at the time, largely caused by increasing costs hitting margins. The stock has been recovering since that downturn, and currently maintains a much stronger outlook on the back of growing demand for single-family homes, and a continually improving jobs market. The current price of $29.48 is supported by the lower rising channel, offering in my opinion a good entry point for a solid business with value fundamentals in a sector which benefit directly from projected improvements in the economy.
The most recent quarter reported sales growth of 20.87% (relative to the same quarter a year ago). Gross margins were maintained (actually grew by half a percent), with operating margins improving by 17.7%. Operating income to enterprise value currently stands at 9.13%, while free cash flow to market-cap is at a healthy 7.54%. The company has a reasonable debt-to-capital ratio of 43.82%. (Source: CapitalIQ).
TRI Pointe Group Inc.
Shares in single-family homebuilder TRI Pointe Group have been consolidating in a narrowing sideways triangular channel for the best part of the year, currently trading at the top of the channel, with potential breakout above the current price/resistance at $17.16. The stock has rallied from $16 in the past four days alongside other homebuilders like PulteGroup, on the back of a growing U.S. economy and housing sector in general.
The most recent quarter reported sales growth of 20.87% (relative to the same quarter a year ago). Gross margins were maintained (flat), while operating margins grew by 17.71%. Operating income to enterprise value currently stands at 8.7%, while free cash flow to EV (FCF/EV) is at a healthy 5.51%. The company has a reasonable debt-to-capital ratio of 43.8%. Current EV/EBITDA multiple stands at 10.96, providing a basis for some continuing upside in the stock price. This is backed by a relative volume over the past four days exceeding 109.8% of the 90-day average (Source: CapitalIQ).
More articles to follow, focusing on Technology, Industrials, and Healthcare, based on similar screening/value methods.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PHM over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.